We explore the economics of data centers and uncover the surprising effect of cloud computing on real estate value.
Why are data centers such a big deal for real estate?
Data centers have existed for a long time, but only recently became a major issue in commercial real estate.
Data centers started small, typically a PBX in a telecom closet, perhaps a fileserver and a mail server. As IT applications grew, firms added more and more gear. Now almost every tenant will have a significant data closet, often with supplemental cooling. High tech and financial tenants have generally taken things further and may build out separate spaces for hosting racks of equipment, invest in supplemental cooling, and ask for leases with chilled water supply from main building systems.
For a long time, the wattages involved were not enough to affect energy management. Today, the wattages are simply amazing. We all know that servers eat power and produce heat, but it’s easy to underestimate just how much demand is now driven by data centers.
As an example, a Dell PowerEdge 2950 with a low-power chip will consume about 380 watts (pdf). A standard rack holds 20 of these servers, for a full rack load of 7.6 kilowatts. Double that number for cooling and auxiliary power, and the total is 15.3kW. Put differently, that single rack has the same peak power draw as a typical 6,000 square foot commercial space!
Less than 1% of your total space drives 30% of the total spend
Of course, server rooms contain more than just racks of servers. The also need room for people and air flow. In general, expect data centers to have an energy density north of 100 watts per square foot, representing both server load and supporting equipment such as air conditioning. Consider the case in which a major tenant takes 50,000 square feet of a 300,000 square feet building, with a “small allocation” of 2,000 square feet of data center. At 100 watts per square foot, the small server room will consume a 200 kW of load. Based on California benchmarks for office space, that small data center will consume over 30% of the electric load in the building. Thats right, less than 1% of the total space drives 30% of the total spend!
Ok, but they pay the rent! Why do we care?
The value of a building, like other financial assets, is the present value of future cash streams. How do data centers affect building value? Most data centers are not sub-metered, so what’s the effect of that “little” data center the leasing agent is encouraging you to take?
A quick review: the capitalization rate (or “cap rate”) of a building is the net operating income divided by the building value. The ratio is helpful for determining the impact of cash flow changes on asset value, since any increase or decrease in operating cash flows can be turned into building value by simply dividing by the cap rate.
A small data center lowers building value by ~$12 a foot
Returning to our example, the energy costs alone of the new data center imply a significant change in building value. At $0.12 per kWH, the extra energy spend of the data center will be $210,000 per year. Assuming a cap rate of 6%, this lowers building value by $3.5M, or $11.69 per square foot!
Also, the data center poses a risk to your EnergyStar rating. In our example, the per square foot kWh usage increased 45%. Depending on the importance of green attributes to tenants, a lower EnergyStar score could lead to longer leasing times and lower rent premiums.
We’ve shown that even small data centers dramatically increase energy spend, decrease building value, and challenge environmental goals. The good news is that the the rapid adoption of cloud technologies will help reverse the trend. Take Gridium for example: all internal applications are cloud-based, and our server closet is empty. Even our PBX is in the cloud. The only on-site machines are employee laptops. It will be a long time before most organizations look like Gridium, but the trend of ever-increasing data centers should start to abate.
In the mean time, there are some practical and easy things you can do to embrace the cloud in your business and lead your organization through the transition.
- Ensure your leasing agents understand the basic energy figures above as they relates to your property. Gather your team for a discussion on building value and help leasing agents understand that a tenant without high data center needs is worth more (all things being equal) to one that wants one.
- Where possible, submeter data center space. This will help preserve your options to eliminate this space from a green profile like Energy Star, as well as clearly manage and communicate the good operational efficiency of the rest of the building. (If your sub-metering project is rejected, send this blog post to the asset manager and let us know how it goes.)
- If mechanical equipment is more heavily used by data center tenants, don’t distribute those costs equally. This is a favorite red-meat item for common area maintenance audit firms, and can eat up major expenses and disrupt tenant relations.
- Encourage cloud computing for tenants. This can be as simple as promoting higher speed Internet connections for tenant spaces and considering a discounted rent structure as long as no servers are deployed in the space. Many firms have created a “green lease” in the last few years. Perhaps someone will create a “cloud lease”?